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Hedging By Utilities Cost State Ratepayers $800M

Dockside Cranes are seen during sunset at the harbour on December 12, 2012 in Hamburg, Germany.

File photo of people using gas heat in their homes. (Photo by Joern Pollex/Getty Images)

OLYMPIA, Wash. (AP) — The hedging practices of natural gas companies in Washington state have cost ratepayers hundreds of millions of dollars in recent years, and officials said Thursday they are recommending a moratorium on new hedging arrangements.

The state attorney general’s office said it wants the Washington Utilities and Transportation Commission to continue investigating the hedging strategies used by utilities, in which the companies purchase gas futures in order to protect against sudden price increases. Lisa W. Gafken, an assistant attorney general, said companies have no real incentive to improve their purchasing efforts — something that is evident in the losses during recent years.

“They didn’t prudently manage their hedging strategies,” she said.

In the last five years, the natural gas companies incurred hedging losses of about $800 million, according to the attorney general’s office. Those costs are passed directly to ratepayers. Gafken said ratepayers face more losses in the future because the companies already are locked in other futures contracts at high gas rates.

Utilities use hedging to avoid dramatic changes in gas prices. With an economic downturn and increased domestic production in recent years, natural gas prices fell, contributing to the hedging losses. But Gafken said there were losses in other years, too, including $60 million in net losses between 2002 and 2007 — a period in which prices increased.

The attorney general’s office is recommending that officials place a moratorium on companies from entering into new hedging arrangements. It also wants state regulators to explore whether there is a way to prevent some hedging costs from being passed to ratepayers. Officials also want to investigate how best to address market fluctuations.

David Mills, vice president of energy supply operations at Puget Sound Energy, compared the hedging efforts to buying insurance. He said the company’s gas traders are not aggressively speculating on the market but following a steady process based on multiyear forecasts.

Mills said there will be times when there are losses, but the program isn’t designed to gain or lose on the investment. Instead, it helps protect consumers from sudden spikes and upward trends in the market. Mills said removing the ability to purchase futures contracts on natural gas would leave ratepayers at the whim of the spot price, making it even more volatile.

“The hedging is really just a method to remove variability,” he said.

The Washington Utilities and Transportation Commission is holding a meeting on the issue Friday.